Political Uncertainty and Expected Market Uncertainty: The Uncertainty of Policy Changes

Abstract

This study examines the impact of policy-change-induced political uncertainty on expected market uncertainty through the recent U.S. presidential elections. Guided by Pástor and Veronesi (2013), our political uncertainty measure captures the probability of policy changes. We apply VIX futures term structure and unveil both long-term and short-term impacts of political uncertainty: in the long term, the uncertainty elevates the convexity of the term structure, increasing concerns about future market volatility, while in the short term, it brings the term structure to a hump shape around the event. Additionally, consistent findings are obtained from national polls, battleground states, and betting markets.

Keywords: Political uncertainty, Policy changes, Expected market uncertainty, VIX futures term structure, the U.S. Presidential Election, Battleground States, Betting Markets

JEL Classification: G12, G14, G18